Adeco Exploration Co. et al. v. Hunt Oil Co. of Canada Inc. et al., (2008) 437 A.R. 33 (CA)

• Judge: Ritter, O'Brien and Rowbotham, JJ.A.
• Court: Court of Appeal (Alberta)
• Case Date: March 12, 2008
• Citations: (2008), 437 A.R. 33 (CA);2008 ABCA 214

Adeco Exploration Co. v. Hunt Oil Co. (2008), 437 A.R. 33 (CA);

      433 W.A.C. 33

MLB headnote and full text

Temp. Cite: [2008] A.R. TBEd. AU.027

Adeco Exploration Company Ltd., Shaman Energy Corporation and Rana Resources Ltd. (respondents/plaintiffs) v. Hunt Oil Company of Canada, Inc. (appellant/defendant) and Adeco Exploration Company Ltd. and Shaman Energy Corporation (respondents/third parties)

(0701-0176-AC; 2008 ABCA 214)

Indexed As: Adeco Exploration Co. et al. v. Hunt Oil Co. of Canada Inc. et al.

Alberta Court of Appeal

Ritter, O'Brien and Rowbotham, JJ.A.

June 9, 2008.

Summary:

Hunt Oil Company of Canada Inc. (Hunt Oil), Adeco Exploration Company Ltd. (Adeco), and Shaman Energy Corporation (Shaman) jointly owned certain oil and gas leases issued by the province of Alberta. Hunt Oil owned a 75% interest in the leases, Adeco 16.66675% and Shaman 8.3325%. Rana Resources Ltd. (Rana) owned a 3% royalty interest in production from the leases. Hunt Oil was the operator. It failed to continue the oil and gas leases on two undrilled quarter sections because it did not prepare and submit the mapping required by Alberta Energy. Thereafter, Hunt Oil bid for the terminated parcels, but was unsuccessful. Adeco and Shaman sued Hunt Oil, alleging breach of its contractual duty to keep the leases in good standing; negligence in the renewal process; and breach of a fiduciary duty to maintain the leases in good standing. Rana sued Hunt Oil for its royalty losses, alleging breach of the royalty agreement and breach of its fiduciary obligations. Hunt Oil sought indemnity from Adeco and Shaman under the royalty agreement based on their respective interests in the leases. Adeco and Shaman defended that the participation agreement entered into by the parties altered the royalty agreement, such that liability was now to be determined on the basis of responsibility under their joint operating agreement (JOA), which rendered Hunt Oil fully responsible to Rana. At issue, inter alia, was the interpretation of provisions of the 1990 version of the Canadian Association of Petroleum Landmen Operating Procedure (CAPL) which had been incorporated into the JOA.

The Alberta Court of Queen's Bench held that Hunt Oil was liable for failing to continue the oil and gas leases to Adeco, Shaman and Rana and, as a result of a provision in the royalty agreement, its liability to Rana was sole. Further, Hunt Oil's actions with respect to Adeco, Shaman and Rana raised a fiduciary duty, which was breached, and Hunt Oil was negligent in the steps that it took, or failed to take, in renewing the leases. Hunt Oil appealed.

The Alberta Court of Appeal dismissed the appeal, but for different reasons than those provided by the trial judge. The court held that clause 401 of the CAPL precluded non-operators from successfully advancing claims against an operator for either negligence or breach of contract, unless the non-operators proved that the operator was grossly negligent. However, gross negligence had been made out on the facts. The court also held that Adeco and Shaman were not contributorily negligent, no fiduciary duty was owed by Hunt Oil to Adeco, Shaman and Rana, and Hunt Oil alone was responsible for Rana's losses.

Contracts - Topic 2108

Terms - Express terms - Indemnity clauses - Hunt Oil, Adeco and Shaman jointly owned certain oil and gas leases - Rana owned a 3% royalty interest in production from the leases - Hunt Oil was the operator - It failed to continue the oil and gas leases on two undrilled quarter sections because it did not prepare and submit the mapping required by Alberta Energy - Thereafter, Hunt Oil bid for the terminated parcels, but was unsuccessful - Adeco and Shaman sued Hunt Oil - Rana sued Hunt Oil for its royalty losses, alleging breach of the royalty agreement and breach of its fiduciary obligations - Hunt Oil sought indemnity from Adeco and Shaman under the royalty agreement based on their respective interests in the leases - Adeco and Shaman defended that the participation agreement entered into by the parties altered the royalty agreement, such that liability was now to be determined on the basis of responsibility under their joint operating agreement (JOA), which rendered Hunt Oil fully responsible to Rana - The Alberta Court of Appeal held that an inclusion agreement, which added the forfeited leases to the mix of properties involved, amended or altered the royalty agreement and imposed on it the terms of the JOA - Included in those terms was clause 401 of the 1990 Canadian Association of Petroleum Landmen Operating Procedure which had been incorporated into the JOA - Clause 401 rendered Hunt Oil solely responsible for any omission by it that constituted gross negligence - Since Hunt Oil's failure to continue the leases was a result of its gross negligence and Rana's losses flowed from that gross negligence, Hunt Oil was solely responsible for them - See paragraph 75.

Contracts - Topic 2126

Terms - Express terms - Exclusionary clauses - Interpretation - [See second Mines and Minerals - Topic 8004 ].

Equity - Topic 3607

Fiduciary or confidential relationships - General principles - Relationships which are not fiduciary - Hunt Oil, Adeco and Shaman jointly owned certain oil and gas leases - Rana owned a 3% royalty interest in production from the leases - Hunt Oil was the operator - It failed to continue the oil and gas leases on two undrilled quarter sections because it did not prepare and submit the mapping required by Alberta Energy - Thereafter, Hunt Oil bid for the terminated parcels, but was unsuccessful - Adeco, Shaman and Rana sued Hunt Oil, alleging, inter alia, breach of fiduciary duty - The Alberta Court of Appeal imposed no fiduciary duty - Adeco, Shaman and Rana were vulnerable to the economic consequences of Hunt Oil's failure to continue the leases, which Hunt Oil had a contractual obligation to do - Further, each was entitled to assume that Hunt Oil would do what it had contracted to do, without their having to act in an oversight capacity - However, perfect results were not required - Rather, a fiduciary duty required that those subject to it would act loyally, avoid conflicts of interest, and not profit at the beneficiary's expense - There was no evidence that Hunt Oil did not act loyally, was in a conflict of interest, or that it had benefited at all - Its acts were neither intentional nor self-directed - See paragraphs 65 to 74.

Mines and Minerals - Topic 8004

Oil and gas - Operating Procedure of the Canadian Association of Petroleum Landmen (CAPL) - Interpretation and application - Hunt Oil, Adeco and Shaman jointly owned certain oil and gas leases - Hunt Oil was the operator - It failed to continue the oil and gas leases on two undrilled quarter sections because it did not prepare and submit the mapping required by Alberta Energy - Thereafter, Hunt Oil bid for the terminated parcels, but was unsuccessful - Adeco and Shaman sued Hunt Oil, alleging, inter alia, negligence and breach of its contractual duty to keep the leases in good standing - Their joint operating agreement (JOA) incorporated the 1990 version of the Canadian Association of Petroleum Landmen Operating Procedure (CAPL) - Hunt Oil argued that clause 401 of the 1990 CAPL precluded non-operators from successfully advancing claims against an operator for either negligence or breach of contract, unless the non-operators proved that the operator was grossly negligent - The Alberta Court of Appeal agreed - See paragraphs 28 to 44.

Mines and Minerals - Topic 8004

Oil and gas - Operating Procedure of the Canadian Association of Petroleum Landmen (CAPL) - Interpretation and application - Hunt Oil, Adeco and Shaman jointly owned certain oil and gas leases - Rana owned a 3% royalty interest in production from the leases - Hunt Oil was the operator - It failed to continue the oil and gas leases on two undrilled quarter sections because it did not prepare and submit the mapping required by Alberta Energy - Thereafter, Hunt Oil bid for the terminated parcels, but was unsuccessful - Adeco and Shaman sued Hunt Oil, alleging, inter alia, breach of fiduciary duty to maintain the leases in good standing - Rana sued Hunt Oil for its royalty losses, also alleging, inter alia, breach of its fiduciary obligations - The joint operating agreement (JOA) between Hunt Oil, Adeco and Shaman incorporated the 1990 Canadian Association of Petroleum Landmen Operating Procedure (CAPL) - The Alberta Court of Appeal held that clause 401 of the CAPL, which precluded non-operators from successfully advancing claims against an operator for either negligence or breach of contract, unless the non-operators proved that the operator was grossly negligent, did not oust claims for breach of fiduciary duty - First, the CAPL did not apply to Rana - Second, the exclusion in clause 401 was by its own terms limited to contract and tort breaches and exclusion clauses were strictly construed - See paragraphs 63 and 64.

Mines and Minerals - Topic 8128

Oil and gas - Leases - Renewals and extensions - [See first Mines and Minerals - Topic 8004 ].

Mines and Minerals - Topic 8128

Oil and gas - Leases - Renewals and extensions - Hunt Oil, Adeco and Shaman jointly owned certain oil and gas leases - Hunt Oil was the operator - It failed to continue the oil and gas leases on two undrilled quarter sections because it did not prepare and submit the mapping required by Alberta Energy - Thereafter, Hunt Oil bid for the terminated parcels, but was unsuccessful - Adeco and Shaman sued Hunt Oil, alleging, inter alia, negligence and gross negligence - The Alberta Court of Appeal held that Hunt Oil's conduct constituted not only negligence but gross negligence - The system that existed at Hunt Oil involved a great deal of ad hoc response to crises by personnel lacking requisite knowledge and skills - It was a system that contemplated no problems, and worked so long as the continuation involved leases on producing lands - It did not come close to addressing what was required for continuations on non-producing lands - See paragraphs 45 to 58.

Mines and Minerals - Topic 8128

Oil and gas - Leases - Renewals and extensions - Hunt Oil, Adeco and Shaman jointly owned certain oil and gas leases - Hunt Oil was the operator - It failed to continue the oil and gas leases on two undrilled quarter sections because it did not prepare and submit the mapping required by Alberta Energy - Thereafter, Hunt Oil bid for the terminated parcels, but was unsuccessful - Adeco and Shaman sued Hunt Oil, alleging, inter alia, negligence and gross negligence - Hunt Oil alleged that Adeco and Shaman were contributorily negligent - The Alberta Court of Appeal found no contributory negligence - The court upheld the trial judge's fact finding that neither Adeco nor Shaman were given copies of the materials Hunt Oil sent to Alberta Energy with its continuation application - Hunt Oil also argued that subsequently, when it sent copies of Alberta Energy's rejection letter to Adeco and Shaman, Adeco and Shaman were negligent in failing to ascertain the true state of affairs and take corrective steps - The court rejected this argument because it required an assumption by Adeco and Shaman that Hunt Oil, as operator, was and would continue to be negligent and fail to fulfill its contractual obligations - See paragraphs 59 to 62.

Mines and Minerals - Topic 8162

Oil and gas - Royalty agreements - Interpretation - [See Contracts - Topic 2108 and second Mines and Minerals - Topic 8004 ].

Mines and Minerals - Topic 8231

Oil and gas - Operation and production agreements - Obligations of operator - Fiduciary - [See Equity - Topic 3607 ].

Mines and Minerals - Topic 8350

Oil and gas - Wells - Operation - Negligence of operator (incl. gross negligence) - [See second Mines and Minerals - Topic 8128 ].

Torts - Topic 4

Negligence - Gross negligence defined - [See second Mines and Minerals - Topic 8128 ].

Torts - Topic 6626

Defences - Contributory negligence - Particular cases - Negligent performance of contract - [See third Mines and Minerals - Topic 8128 ].

Cases Noticed:

Housen v. Nikolaisen et al., [2002] 2 S.C.R. 235; 286 N.R. 1; 219 Sask.R. 1; 272 W.A.C. 1; 2002 SCC 33, refd to. [para. 26].

Meyer v. Partec Lavalin Inc. et al. (2001), 281 A.R. 339; 248 W.A.C. 339; 2001 ABCA 145, leave to appeal denied (2002), 289 N.R. 198 (S.C.C.), refd to. [para. 27].

Jager v. Liberty Mutual Fire Insurance Co. et al. (2001), 281 A.R. 273; 248 W.A.C. 273; 93 Alta L.R.(3d) 391; 2001 ABCA 163, refd to. [para. 27].

Hodgkinson v. Simms et al., [1994] 3 S.C.R. 377; 171 N.R. 245; 49 B.C.A.C. 1; 80 W.A.C. 1, refd to. [para. 27].

Huff and Donnelly v. Price (1990), 51 B.C.L.R.(2d) 282 (C.A.), refd to. [para. 27].

Amoco Canada Petroleum Co. et al. v. Quantel Engineering (1981) Ltd. et al. (2002), 318 A.R. 335; 2002 ABQB 521, refd to. [para. 32].

Reid Crowther & Partners Ltd. v. Simcoe & Erie General Insurance Co., [1993] 1 S.C.R. 252; 147 N.R. 44; 83 Man.R.(2d) 81; 36 W.A.C. 81; [1993] 2 W.W.R. 433, refd to. [para. 32].

McCain Produce Co. et al. v. Canadian Pacific Ltd. (1980), 30 N.B.R.(2d) 476; 70 A.P.R. 476 (C.A.), affd. [1981] 2 S.C.R. 219; 38 N.R. 534; 35 N.B.R.(2d) 511; 88 A.P.R. 511, refd to. [para. 32].

Morel v. Lefrancois (1906), 38 S.C.R. 75, refd to. [para. 33].

Brinkerhoff International Inc. v. Numac Energy Inc. (1997), 209 A.R. 195; 160 W.A.C. 195 (C.A.), refd to. [para. 33].

Consolidated-Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., [1980] 1 S.C.R. 888, 32 N.R. 488, refd to. [para. 33].

Erehwon Exploration Ltd. v. Northstar Energy Corp. (1993), 147 A.R. 1; 15 Alta. L.R.(3d) 200 (Q.B.), consd. [para. 34].

Kingston (City) v. Drennan (1897), 27 S.C.R. 46, refd to. [para. 55].

McCulloch v. Murray, [1942] S.C.R. 141, refd to. [para. 55].

United Canso Oil & Gas Ltd. v. Washoe Northern Inc. et al. (1991), 121 A.R. 1 (Q.B.), refd to. [para. 55].

Holland v. City of Toronto, [1927] S.C.R. 242; 59 O.L.R. 628, refd to. [para. 55].

Missouri Pacific Ry. Co. v. Shudford, 72 Tex. 165; 10 S.W. 408, refd to. [para. 55].

Frame v. Smith and Smith, [1987] 2 S.C.R. 99; 78 N.R. 40; 23 O.A.C. 84, refd to. [para. 65].

International Corona Resources Ltd. v. LAC Minerals Ltd., [1989] 2 S.C.R. 574; 101 N.R. 239; 36 O.A.C. 57, refd to. [para. 65].

Luscar Ltd. and Norcen Energy Resources Ltd. v. Pembina Resources Ltd. (1994), 162 A.R. 35; 83 W.A.C. 35; 24 Alta. L.R.(3d) 305 (C.A.), leave to appeal denied [1995] 3 S.C.R. vii; 193 N.R. 398; 184 A.R. 159; 122 W.A.C. 159, refd to. [para. 68].

C.A. et al. v. Critchley et al. (1998), 113 B.C.A.C. 248; 184 W.A.C. 248; 60 B.C.L.R.(3d) 92 (C.A.), refd to. [para. 71].

Authors and Works Noticed:

Petch, John, The Operator's Standard of Care in Wellsite Operations: Part I (2002), 5:4 PJVA Newsletter 4, generally [para. 42].

Counsel:

C.A. Crang, for the respondents/plaintiffs;

M.E. Killoran and K. Osaka, for the appellant/defendant.

This appeal was heard on March 12, 2008, by Ritter, O'Brien and Rowbotham, JJ.A., of the Alberta Court of Appeal. Ritter, J.A., delivered the following decision for the court on June 9, 2008.